Bitcoin: banks are beginning to believe the hype

The emergence of cryptocurrencies such as Bitcoin is beginning to pose a real threat to banks’ dominance of the multi-billion global payments business. Banks are still trying to figure out how best to respond. Some are a bit further ahead than others.

JPMorgan is one financial institution that has seemingly
attempted to take advantage of the digital craze. The US bank
recently filed for a patent for an online payment system -
though it was ultimately rejected - that had a strong
whiff of Bitcoin about it. JPMorgan has since dismissed the
idea that its patent application was in any way inspired
by Bitcoin, saying that its original patent application was
made 13 years ago, before Bitcoin even took off.

That JPMorgan filed for a patent at all does nevertheless
signify how serious big banks are about the evolution of online
payment systems, an importance no doubt enhanced by customer
demand and the meteoric, if speculative, rise of Bitcoin.

The emergence of Bitcoin lit a fire under JPMorgan and
pushed it to do the things its customers have been calling for
it to do for years, says Chris Odom, chief technology
officer at Monetas, a financial and legal transactions system
designed to be integrated into the Bitcoin economy.

The big revolution we are witnessing is the emergence
of the internet for value, says Chris Larsen, CEO of
Ripple Labs, the creator of the Ripple payments network, which
is online and global. The world has learned how to build
value exchange systems without a central operator. He
adds that JPMorgans patent suggests that it is now under
way in designing its own payments system suited to the internet
age.

Indeed, JPMorgans patent application said that
although credit cards dominate the market for online payments
 and are likely to continue to do so for at least five
years  their high processing costs and risks limit their
use. The bank says what the internet needs is something that is
a quick, cheap and simple way of transferring value.

What they propose is a means of making anonymous payments
without provision of an account number or name from the
payer. Their system would make internet shopping safer by
withholding information from merchants that allow them to
withdraw money from customer accounts, the demand for which has
existed for years.

Odom says: They were under pressure to do something so
they tackled the insecurity of credit cards, from which you can
take money if you have a number. But this isnt a new
problem, people have complained about this for years. It just
took Bitcoin to make a bank do something about it.

Whatever JPMorgan is now contemplating, banks are certainly
thinking hard about how to profit from the growth of Bitcoin,
although for now they are keeping their own counsel. Naturally
there is concern that the growth of payments on new, non-bank
systems such as Ripple and Monetas will divert flow away from
banks and therefore undermine bank profitability. However, the
opposite might actually happen.

Skype, for example, did not adversely affect the
communications companies  it increased the overall level
of communication  and maths-based currency systems will
do the same with payments, says Larsen. Ripples vision of
the future envisages banks acting as gateways to the payments
network. Although they might have to accept smaller margins per
transaction, they will generate revenues on increased traffic,
says Larsen.

At this early stage of development the Bitcoin economy is to
some extent dominated by libertarians who love the currency in
part precisely because of its separateness from existing
financial infrastructure. But banks are already starting to
take notice.

However, Steven Englander, head of G10 FX strategy at Citi,
is extremely sceptical about the prospects for Bitcoin. The
proliferation of many cryptocurrencies will undermine the
success of any one of them, he says. But the very fact that
Citi, and Bank of America Merrill Lynch, put out research notes
on Bitcoin tacitly recognizes its emergence as a currency. And
not all bankers are so sceptical.

Acknowledging the currency as tamper-proof, divisible and
finite, David Woo, head of global rates and currencies research
at BAML, says: We believe Bitcoin can become a major
means of payment for e-commerce and may emerge as a serious
competitor to traditional money transfer providers. As a medium
of exchange, Bitcoin has clear potential for growth, in our
view.

The stage is therefore set for Bitcoins arrival in the
mainstream, which should switch the emphasis on the currency's
anonymity and potential for tax avoidance and illegal
activities towards an interest in resolving outstanding issues
concerning security and excessive complexity. This creates an
opening for banks.

Recent developments suggest some banks might develop
proprietary systems to meet the demands Bitcoin has exposed.
Banks would still have some key advantages if they adjusted
their businesses to remain competitive in the new environment.
They remain universally recognized, enjoying a certain level of
trust when it comes to money, even if they are not liked. They
have the capital to develop systems and the reach to roll them
out globally.

Add Your Comment

All fields are compulsory

All comments are subject to editorial review as we are subject to the same regulations adhered to in publishing our own content. For this reason, your comment may not be live immediately, or may not be published.

Magazine

The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies Policy before using this site.